One of the questions we are most frequently asked by clients is whether now is a good time to convert their rands into dollars to invest offshore. There are two big factors to consider when dealing with this question, namely:
- What is the conversion ratio between the rand and the dollar?
- Is it a good time to invest in offshore assets?
In answering the first question it is important to note that currency fluctuations are unpredictable and can impact returns over the shorter term. If you convert your rands into dollars and the next day the rand strengthens against the dollar, you will have an immediate currency loss on your investment if you should convert it back the same day. Taking an extract from one of Anchor Capital’s recent newsletters, we learn the following:
“Analysing the rolling one-year performance of the rand from January 2000 to February 2024 reveals that the local unit depreciated relative to the US dollar on approximately 67% of the measured days over one year. This likelihood increases significantly over longer periods, reaching 77% and 82% over three- and five-year rolling periods, respectively. These statistics suggest that, historically, the rand has been more likely to weaken than strengthen, reinforcing the notion that history is on your side when externalising your funds”.
It is clear that one should not wait for the rand to strengthen if your aim is to invest in offshore assets for the longer term, unless there has been a dramatic movement in the currency due to a clearly identifiable event, in which case one could wait for a normalization in currency levels.
The answer to the second question is of more importance. We have to start off by saying that it is very common for international assets like bonds and equities to increase in value at the same time that the rand strengthens against the dollar. So even if you do decide to wait for the rand to get stronger before you buy dollars, and you are lucky enough for this to happen, you will more than likely pay more for your bonds and shares once you do convert your rands into dollars. The decision to invest offshore should be based not on the level of the currency, but on the longer-term risk/reward you can get.
Over the last decade it has definitely been better to have been invested offshore, not only because the rand has weakened against the dollar, but also because offshore equities have performed better than local equities. Currently we believe that although there are companies in our local market that do offer value, the uncertainties facing our political environment cannot be ignored. We believe that there are many international companies offering similar or even better valuations than those available in South Africa, but in countries where the economic and political environments are much more stable and predictable than our own.
When deciding where to invest your funds, currency should not play a major role. It is more important to decide on the duration of your investment and the relative valuation of potential investments. If you live in South Africa, shorter-term investments and cash should be held in rands and only money earmarked for longer-term purposes should be invested offshore. For the time being, investing in American companies is still a good idea but countries like India, Indonesia, Vietnam and Korea do offer better value in some cases, with loads of potential.
